Making the decision to work for yourself is very much the easy part.
We’re not trivialising this aspect, but the truly hard work begins after you have decided to go it alone. After this point, it all becomes more challenging, as you try to ensure you’re following your passion at the same time as making sure you’re following the laws of your country.
There are many elements of legislation that are connected to self-employment, and we’re going to look at the fundamentals in this article.
First of all, your status
One aspect of this issue that many people don’t understand is your employment status. If you want to start your own business or additional source of income and you’re currently employed, there’s nothing stopping you. You don’t have to leave the job to work for yourself. You can simply make your declaration to HMRC in exactly the same way, whether you’re unemployed or employed.
Whether you are employed or unemployed, to become a sole trader means registering with HMRC. This has to be done by October 5th in the second tax year of your self-employed status. If this is not done, there will be problems further down the line and you can expect fines for not doing so.
Once you have registered as self-employed with HMRC, you then need to get on with the next important step in working for yourself. And that involves the financial aspects of your new-found status.
A business bank account
You must open up a business bank account once you start working for yourself. Even if you think you aren’t running a business you are still strongly advised to separate your self-employed income from any other income you have.
These special business bank accounts are offered by all high street lenders, and they aren’t very expensive to run. Money aside, it’s important to remember that having a business bank account keeps all your money separate and where it should be. Having everything going into a personal account is just a recipe for disaster.
Having a business account immediately also lends you credibility with customers. They want to see someone who has a professional image. A business bank account helps with that.
Shop around for a good deal in business bank accounts. There are plenty of banks out there that are willing to offer preferential rates. These perks may be small, but it costs a lot to run a business, no matter what that business involves. So having the best perks possible may well be the difference between doing well and not doing well.
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When you are self-employed, it is up to you to manage your taxes. This means filling in a self-assessment form once a year, informing HMRC of your financial dealings. If you’ve come to believe that self-employment means excruciating hours spent in front of a computer trying to reconcile the taxes, you’re pretty much on the right path.
Taxes are hard to maintain. But this is what you have to do. There are many nuances within the self-employed tax area, and these will be important to bear in mind if the conditions apply. Tax can involve other issues, such as:
- If you are married or if you live with a partner who offers help for the business you can claim whatever salary you paid to them as a business expense. This is not automatically a right, and there are checks to be made, but it’s a possibility and you should investigate the situation with an accountant
- It’s absolutely vital that you keep impeccable records of all financial matters around your business. This includes keeping a running account of income and expenses. There are plenty of ways to do this now, especially with the number of services available via the Internet. But ensure you keep these records. It makes a lot more sense to have all of your information to hand at the end of the tax year, rather than searching for paper and details in one mad rush.
- The prompt payment of tax is incredibly important. If you don’t make your tax return before the HMRC deadline, you will be fined. There is no leeway here, so this has to be a definite resolution as you start earning
- Value Added Tax (VAT) is another important factor. It may be that you fall under the threshold for paying VAT. As of tax year 207-2018, if you earn more than £85,000 revenue a year through your new venture, you will be in a position where you have to pay this tax
This is another key factor that you cannot afford to ignore. Insurance covers many areas, and previously, you won’t have had to worry about it. If you were employed before, employees do not have to worry about most aspects of insurance. But when you’re on your own, it becomes one of the biggest concerns you may have.
Most importantly, if you take on somebody to work for you, even if they are only working part-time, you will have to take out an employer’s liability policy. For this, you will need to ensure you have cover, because there is the potential of having to pay a fine of up to £2,500 a day for every day you don’t have it. Once you have the cover in place, you need to display a notice that says you do. The consequences of not having cover can mean a significant loss in the form of a fine.
Public liability insurance is the next one you need to consider. This is especially important if you have clients visiting you on a property you own.
If you’re in a situation where you provide advice or consultancy to clients, you will also need to take out another kind of insurance, professional indemnity. A client may not agree with the advice they have paid for, or the consultancy fees you demand. This insurance will give you some element of cover for this.
Hiring an accountant
This could be the most important decision you make. However, there are many different types of accountant, and the quality can vary considerably.
Decide which type of accountant you need. Some people who work for themselves have plenty of international clients, for example. This may mean you choose an accountant that is experienced with working with such clients. You may just need someone to keep simple books, and deal with tax. There is some complexity here, so take the time to think about what your business will be like in a year’s time.
This should help you decide upon the type of support you need.
Then, you need to choose a good accountant, by asking these questions when you meet them for the first time:
- Have you got any references? Just like you would expect from one of your clients, ask a prospective accountant for references. Don’t forget that these people are asking to handle your money. Don’t forget to ask for references from people just like you also. The accountant may deal with a number of clients at the same time
- How can you save me money? This is a legitimate question, because accountants aren’t just about recording information for tax purposes. They should be able to find ways to save you money. All good businesses are interested in cutting costs or finding tax breaks that can help with their bottom line. You should be no different, and it’s rare for an accountant to be unable to reduce your costs. Check this is possible, and see what their ideas may be on this matter
- I look after my accounts, am I doing it right? An accountant should be able to take a look at the books you’ve been keeping and almost immediately tell you what works and what is holding you back. They are in a position where they can tell you what can be improved upon. If they stumble here, don’t hire them
- Can you tell me about your fee structure? Unfortunately, accountants vary significantly when it comes to fees. They may charge by the hour, or by the month on a retainer. Ask them to elaborate on this, so that you can be confident their service is manageable by you financially
There is a mindset that you will need to get into if you’re going to survive the process of working for yourself. Whatever field you end up working in, you need to think about this mindset. The bad news is that if you don’t, you’re going to fail.
If you work for yourself, you have to take full responsibility for everything that happens. This means the stresses that you feel may be unavoidable, but you still have to manage them. Working for yourself is challenging, throughout the working day, and if you can’t take full responsibility you’re making a big mistake.
If you know you have to do something (such as record a payment or expense) then you need to stick that on your to-do list and get on with it. Procrastination is something you cannot afford to experience. It’s all on you.
This can be a good thing too. If you’re successful, you get to take the credit. But just remember there is no one holding your hand. Full responsibility for your success will always be on your shoulders.
Plan your day
Again, what you do, whether it’s day-trading or running a fruit stall, relies entirely upon self-discipline. Things have to happen at a certain time in the day. So plan your day out by the hour.
If you stick to that plan, you shouldn’t find that you’re in a rut. It’s important that you have every hour of your day accounted for as much as possible. This way, you have less time to worry and will spend more of your time just getting things done.
Take breaks, and focus on health
With that planned day, make sure you sprinkle in some breaks too, that allow you to have time to focus on health. Join a gym, or just take the dog for a walk. You must get out of your work environment on a regular basis. This is why employers schedule breaks for employees. It’s great to work hard, but not so great to forget your health.
Be ready to work
You will end up spending many hours a day on the work. This is especially true if you’re trading, for example. Because you need to make a certain level of income, and things may go wrong, you don’t have the protection of a salary.
Be ready to wake up early and go to bed late, at least for the first year. As you become more successful, you may be in a position where you can cut down your hours. But don’t rely on this. Instead, work your socks off and expect to commit most of your waking life to making money and building a future.
Some final thoughts
Working for yourself requires you to combine the practical and the strategic. You need a good foundation of solid mindset and a focus on the legal aspects that will keep you afloat. If you don’t have this, you’re not going to last very long.
However, if you get it right, you’re likely to become addicted to working for yourself. It can be great fun, and the end result can be a worthwhile, rewarding way of life.
Have you considered day trading as a living? Find out how My Trading Skills can help you get started.